CAS Exam 7 Spring 2014, Question 22
Study guide: Exam 9
An insurer has decided to calculate risk-based performance metrics for its two lines of business. It has chosen a risk capital metric of 99th percentile VaR. Below is a summary of results ($000,000) for the two lines of business.
| Line of Business | Expected Annualized Profit | Coefficient of Variation |
|---|---|---|
| A | 50 | 300% |
| B | 9 | 250% |
\Phi^{-1}(0.99) = 2.326- Income follows a normal distribution.
- The lines of business are independent.
Part a (0.75 points)
Determine which line of business performs better using return on risk-adjusted capital.
Part b (0.75 points)
Calculate the return on risk capital and the risk-adjusted performance metric for the portfolio as a whole.
Part c (0.5 points)
Allocate the risk capital to both portfolios using the proportional allocation method.
Part d (1.25 points)
Calculate the allocation of capital using an incremental marginal approach and discuss an advantage this approach has over the proportional allocation method.
Answer this question and see the worked solution